How big should your “Rainy Day” savings account be?

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Most people have heard the tried and true advice: always have an emergency fund full of three to six months of spending in an account that you can access at any time. It’s for those “rainy days” when your car breaks down, or your basement gets flooded, or – God forbid – you unexpectedly lose your job.

Many of us have followed this advice as well. In 2020, 55% of adults in the United States said they set aside an emergency fund that could cover at least three months of spending, according to Federal Reserve data.

But how accurate is this rule of thumb today? The past two years have brought seismic changes in the way we think about work and money. Job cuts are hovering at an all time high and entire industries have been shattered by the pandemic. Millions of people, especially those in restaurant and hospitality jobs, have faced leave and layoffs. And rising inflation is making a dent in all of our portfolios.

What does all this mean for our rainy day hiding places?

Well it depends.

“The difficulty in determining how much emergency savings you need is that it really varies depending on each person’s situation,” says Sophia Bera, CFP and founder of Austin-based GenY Planning.

Someone with reliable, in-demand work might be able to save less than the rule of thumb of three to six months, while a gig worker will want extra padding for off-peak times between deals. A dual-income married couple may be secure with just three months of income, while a single parent may want to set aside a full year of their income.

Investors or savers interested in to become investors – have additional considerations.

With actions breaking records, some people might find it frustrating to put all of their disposable income in a savings account – even if it is a high yield savings account – which earns next to nothing in the interest rate environment down today.

But remember, “The goal of your emergency fund is not to grow,” says Thomas Kopelman, financial planner and co-founder of Indianapolis-based AllStreet Wealth. Rather, the fund’s goal is to be there when you need it most. Once you’re well positioned with your emergency savings and stable with the rest of your finances, says Kopelman, “you earn the right to invest.”

You can still take advantage of opportunities that arise in the market, but think carefully about your tolerance for risk first.

Bera uses the example of maximizing an annual Roth IRA contribution – a decision that in some cases may take precedence over building up a large emergency fund, she says. Roth IRAs have contribution limits; your savings from rainy days don’t. So, if you know that you will have enough cash to keep increasing your emergency fund in a year, the tradeoff may be worth it.

There are other ways to set yourself up for success when the times are right. With interest rates at historically low levels and an explosive housing market, some people take out a Home Equity Line of Credit, or HELOC, which allows them to borrow money as needed on a revolving basis. A HELOC is like a credit card secured by the equity in your home and can be a “good back-up emergency fund,” says Bera, especially as your home equity – or your access to credit in general – might not be as robust when the market inevitably cools. A HELOC, however, should not replace your usual emergency savings.

All in all, Bera says a three to six month emergency cushion is still a good goal for most people. But no matter which number you choose, the result is always the same: “You have to have enough money to be able to sleep at night,” she says.

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